TGIF 16 October 2020 – A patent purpose: companies reinstated to proceed against liquidator

This week’s TGIF looks at a recent case where the Federal Court ordered the reinstatement of two companies to allow proceedings to be commenced against the liquidator of those companies for alleged breaches of duty (Lee v Parker [2020] FCA 1453).

Key takeaways 

• To reinstate a deregistered company, the Court must be satisfied that:
  
  
  • the applicant is a ‘person aggrieved’ by the company’s deregistration; and
    
    
  • that it is ‘just’ that the company’s registration be reinstated.
    
    
• In circumstances where reinstatement is sought to pursue litigation, the Court must consider the justice of reinstating the company, and not simply the justice of the prospective litigation.  Further, the applicant must prove the claim is not futile or hopeless and has sufficient prospects of success, on a prima facie basis.
  
  
• Public policy considerations associated with ensuring that liquidators comply with their statutory duties might favour reinstatement. However, the Court will assess each case on its merits and will be mindful of the potential return from any litigation having regard to the overall indebtedness of the company in question and the potential benefits for creditors as a whole.  

Background to application

Worldwide Speciality Property Services Pty Ltd (formerly Silverbrook Research) (WSPS) and Serif Pty Ltd (Serif) were deregistered in 2016 and 2019 respectively.

The plaintiffs were the former directors of both companies. Serif owned all of the shares in WSPS and the plaintiffs were the legal and beneficial owners of the shares in Serif.

The plaintiffs sought orders reinstating the two companies under s 601AH of the Corporations Act 2001 (Cth). The plaintiffs also sought that a new liquidator be appointed to WSPS.

The first defendant, Mr Parker, was the liquidator of WSPS between 2014 and 2019. The plaintiffs sought to reinstate the companies in order to commence proceedings against Mr Parker for alleged breaches of fiduciary and statutory duties owed by him as liquidator.

The claims related to 140 patent or patent registration applications held by WSPS in the United States, which Mr Parker allegedly failed to preserve and realise during the liquidation of that company, despite being told of their existence (and their estimated A$18 million value) at the time. Mr Parker denied liability and contested the application.

Applicable test 

The Court identified the applicable test whether to order reinstatement of a company:

• First, whether the application is made by a ‘person aggrieved’ by the deregistration (which should be construed liberally, and includes a person who has a genuine grievance as a result of a decision which prejudices his or her interest, which must be real and direct and can result from a person being subject to legal burden by a decision);
  
  
• Second, whether the Court is satisfied that it is ‘just’ that the company’s registration be reinstated having regard to various factors, including the reasons for reinstatement, any prejudice that might arise and any relevant public policy considerations; and
  
  
• Third, whether there are any reasons why the Court should decline the reinstatement in the exercise of its residual discretion.

In circumstances where reinstatement is sought to pursue legal proceedings, the Court confirmed that:

• The focus is the justice of reinstating the company, not the justice of any proceedings which it is proposed that the reinstated company might institute; and
  
  
• It is generally not appropriate in a reinstatement application for the Court to go into factual matters which are the subject of dispute, and it is generally sufficient for the Court to determine on the material before it whether any proposed proceeding has a prima facie basis, and so would not be futile or hopeless.

What did the Court decide?

The Court was satisfied that the prospective claim against Mr Parker would not be futile or hopeless, and concluded that:

• The plaintiffs met the description of ‘persons aggrieved’; and
  
  
• There was good use to be made of the reinstatement.  

As there was no reason to decline to exercise the discretion, the Court ordered that the companies be reinstated and that a new liquidator be appointed to WSPS.

Person aggrieved

As a shareholder or director is not an ‘aggrieved person’ by that status alone, it was necessary for the plaintiffs to prove that they had suffered prejudice as a result of Mr Parker’s dealings in respect of the patents.  The Court was satisfied this was the case for numerous reasons, including that the plaintiffs had lost valuable rights as the ultimate owners of the companies and that they had lost the ability to potentially recover damages in the event there was a surplus of assets.

In this context, the plaintiffs relied upon expert evidence that the patents had an indicative value of between A$20 million and A$38 million (applying various valuation methodologies).

The Court accepted the evidence of the plaintiffs’ expert, taking into account the interlocutory nature of the application and the lower threshold to be satisfied in proving a prima facie case, in deciding that the case would not be futile or hopeless and could produce real returns for both the plaintiffs and the companies’ creditors, including the ATO.  With respect to the ATO, the Court noted that any successful claim against Mr Parker could result in the plaintiffs’ personal liabilities to the ATO for the tax debts of the companies being reduced.

Just to reinstate companies

The Court was satisfied it was just to reinstate the companies because:

• First, there was good use to be made of the reinstatement with reference to the proposed action against Mr Parker, which was not futile or hopeless; and
  
  
• Second, public policy considerations favoured the actions of the liquidator, an officer of the Court, being reviewed.

Mr Parker made other arguments against reinstatement, including that there was no evidence of funding of the prospective litigation, nor of security for costs, and that there was little if any chance of any material financial return to the company in circumstances where the claim was speculative and the value of the patents might not eclipse WSPS’ debts.  These were dismissed by the Court, as they were all matters for the new liquidator to consider in deciding whether to pursue the litigation.

Comment

Where reinstatement of a company is sought by a person for the purpose of pursuing proceedings, that person must show that they are a ‘person aggrieved’, which will require proof of some real and direct interest that has been infringed. Further, the person will need to demonstrate that the proposed litigation is not futile or hopeless.

While public policy considerations associated with ensuring that liquidators comply with their statutory duties might favour reinstatement, the Court will assess each case on its merits and will be mindful of the potential return from any litigation having regard to the overall indebtedness of the company in question and the potential benefits for creditors as a whole.